Coasean taxes and other energy economics stories

“Economists have spilled a lot of ink trying to specify what an ‘optimal’ Pigou tax would be… Haven’t any of these people read Coase (I mean read him carefully)? One of his explicit aims in ‘The Problem of Social Cost’ (1960) was to correct an important mistake in Pigou’s theory of externalities. Reconceiving externalities (convincingly) as joint- or social-cost problems, Coase argued that the socially efficient level of a Pigovian externality is hardly likely to be zero, as Pigou presumed….

“According to Coase, externalized costs should be reallocated to the producer up to that point where the costs of internalizing the next unit would exceed the social benefits (a standard MC = MB equation). Thus, an ‘optimal’ Coase tax would imply not the Polluter Pays Principle but the ‘Polluter Pays for Inefficient Externalities Principle.'”

The new issue of Energy Policy includes a special section, “Past and Prospective Energy Transitions – Insights from History,” with 13 papers and an introduction by Roger Fouquet and Peter J.G. Pearson. (Access to articles will require a subscription, check with your library.)

5 thoughts on “Coasean taxes and other energy economics stories”

As discussed in response to “Dolan on the WPTC and energy policy”, September 26, 2012, Lynne Kiesling, if the purported societal cost of the externality is set sufficiently high, the required level of a Pigovian externality can be driven to zero asymptotically, even if that level is not, in fact, “socially efficient”.

Who might you suggest as a knowledgeable and unbiased evaluator of the inefficient externality imposed by the use of fossil fuels?

Not exactly an answer to your question but the link below tries to sort out how carbon taxes would interact with the economy. Once again our friend unintended consequences shows up.

The idea of using carbon taxes to pay for externalities seems simple enough in theory, in practice it is complex.

It is impossible for a reasonable person to look at the political economy (AKA rent seekers ball) surrounding renewable energy / carbon reduction strategies and do anything but conclude that the environmentally friendly policy is to keep the politicians and their rent seeking clients far away from energy production.

Thanks for the link. It is not the answer. Actually, I believe it misses the point, since it is based on a “refundable” carbon tax. If government take $1 from me as a carbon tax and gives me $1 through some other mechanism, such as a wage tax or income tax reduction, do they really believe I can’t figure out how to reallocate that same $1. Puhleese! Also, it appears to me that redistributionist tendencies are too strong and too widespread to be resisted.

The purported intent of a carbon tax is to monetize the externalities resulting from the use of fossil fuels and internalize them in the final market prices of goods produced and services provided using fossil fuels, in the hope(?) that the increased prices would cause producers and service providers to switch to lower carbon energy sources and cause consumers to choose products and services with lower “carbon footprints”. Note, however, that there is no direct link between a carbon tax and carbon emissions reductions. However, if you followed the discussions surrounding Waxman-Markey, Kerry-Lieberman and Kerry-Boxer, our congresscritters appeared to be far more interested in the incremental tax revenue potential than in the carbon emissions reductions.

Let’s take a look at your construct: using a carbon tax to pay for externalities. Economists believe that the net externalities are positive over the next 50-60 years, largely as the result of more rapid growth of field crops due to elevated CO2 levels. That means that a carbon tax to pay for externalities would be a current tax to pay a potential future cost. Using history as a guide, this likely would mean that the US fe(de)ral government would collect this “designated” tax and create a (dis)trust fund, similar to the SS and Medicare (dis)trust funds, to hold the funds in anticipation of indeterminate future liabilities. History would also suggest that those funds would almost immediately be used to fund new or expanded programs having nothing to do with climate-induced damage, leaving a “lockbox” full of “special treasury instruments” (IOUs) to be redeemed at some time in the future. Ultimately, the argument would likely be made that the climate-induced damage was worse than expected, thus requiring an increase in the carbon tax.

However, when all is said and done, the carbon tax would not fund the investments required to actually reduce carbon emissions. It would merely add to the total costs of compliance with whatever regulations were established.